Page 244 - Group Insurance and Retirement Benefit IC 83 E- Book

Employee Benefits 193

(iii) in the case of medical benefits, future medical costs, including,
where material, the cost of administering claims and benefit
payments (see paragraphs 88-91); and
(iv) the expected rate of return on plan assets (see paragraphs 107-
109).

75. Actuarial assumptions are unbiased if they are neither imprudent nor
excessively conservative.

76. Actuarial assumptions are mutually compatible if they reflect the
economic relationships between factors such as inflation, rates of salary
increase, the return on plan assets and discount rates. For example, all
assumptions which depend on a particular inflation level (such as
assumptions about interest rates and salary and benefit increases) in any
given future period assume the same inflation level in that period.
77. An enterprise determines the discount rate and other financial
assumptions in nominal (stated) terms, unless estimates in real (inflation-
adjusted) terms are more reliable, for example, where the benefit is index-
linked and there is a deep market in index-linked bonds of the same
currency and term.

Actuarial Assumptions: Discount Rate

78. The rate used to discount post-employment benefit obligations (both
funded and unfunded) should be determined by reference to market yields
at the balance sheet date on government bonds. The currency and term of
the government bonds should be consistent with the currency and
estimated term of the post-employment benefit obligations.
79. One actuarial assumption which has a material effect is the discount
rate. The discount rate reflects the time value of money but not the
actuarial or investment risk. Furthermore, the discount rate does not
reflect the enterprise-specific credit risk borne by the enterprise’s
creditors, nor does it reflect the risk that future experience may differ
from actuarial assumptions.

80. The discount rate reflects the estimated timing of benefit payments.
In practice, an enterprise often achieves this by applying a single weighted
average discount rate that reflects the estimated timing and amount
of benefit payments and the currency in which the benefits are to be
paid.